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TMI Blog2011 (1) TMI 1410X X X X Extracts X X X X X X X X Extracts X X X X ..... pting the Cost Plus Method adopted by the assessee to arrive at arm's length price and rejecting thereby the calculation of arm's length price determined by the TPO by applying transaction net margin method which considering the business of the assessee was the most appropriate method to determine the arm's length price. 2. The appellant prays that the order of CIT(A) on the above grounds be set aside and that of the AO be restored." 2. The facts in brief are that the assessee is a subsidiary of L'Oreal SA France engaged in the business of manufacturing and distribution of cosmetics and beauty products. During the previous year relevant to the assessment year, the assessee had entered into the following international transactions with it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O while completing the assessment u/s 143(3) of the Act, 1961. 4. Being aggrieved the assessee carried the matter in appeal before the CIT(A). The main contention of the assessee before the CIT(A) was that the TPO/AO wrongly rejected the Cost Plus Method adopted by the assessee for computing ALP in manufacturing segment imposing a Transaction Net Margin Method for computing the arm's length price disregarding the recommendations made by the OECD guidelines. According to the TPO "i) under CPM method, Gross margins cannot be considered as other factors such as advertisement, marketing and distribution play a major role in determining the turnover and profitability of the company, ii) Gross margin in case of comparable cases cannot be relied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the international transaction involving purchase of raw materials. It was further submitted before the CIT(A) that CPM is a traditional and transactional method which is typically applied to test the price of goods that are manufactured and then sold and is generally appropriate when the party being examined is not engaged in significant value adding activities. It is used for evaluating the sale of products by manufacturers, where the manufacturer does not own any valuable, non-routine intangibles and otherwise, incurs limited economic risk in the transaction. It was also submitted before the CIT(A) that the assessee had on cost plus method earned a gross margin of 83.66% on input cost as against 59% on input cost earned by comparable co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence over prof it methods. CPM is applied to test the price of goods that are manufactured and then sold or to measure the value of services performed by a service provider and is generally appropriate when the party being examined is not engaged in signif icant value adding activities. Even OECD Guidelines prefer methods which require computation of ALP directly based on gross margin over a method which requires computation of ALP in an indirect method because, comparing gross margins extinguishes the need for making adjustments in relation to differences in operating expenses, which could be different from enterprise to enterprise. As mentioned earlier the Direct Pricing methods (CUP, CPM, RPM) are preferable to indirect entity wise meth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgin used by appellant is a more appropriate measure. This PLI measures the prof its made by appellant on gross basis vis-a-vis the comparable companies and if the said margin is commensurate with that of comparable companies it could be said that the cost of raw material is at arm's length. Net prof it margin which is used in TNMM is affected by various other factors and other expenses which are outside the purview of transfer pricing. TPO's contention that assessee can work out segmental GP Margin in its own case but cannot do the same in case of comparable companies is also not correct in view of assessee's submission that the comparable companies selected are manufacturing companies and search process adopted by it for identifying and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of international transaction relating to purchase of raw materials by rejecting the Cost Plus Method used adopted by the assesee and made an addition of ₹ 1,99,00,000/-. The learned CIT(A) gave a categorical finding that the Cost Plus Method adopted by the assessee is based on the functions performed and not on the basis of types of product manufactured, as normally the pricing methods get precedence over profit methods. The CIT(A) observed that even according to the OECD guidelines the preferred method is that the method requires computation of ALP directly based on gross margin, over other methods which require computation of ALP in an indirect method because, comparing gross margins extinguishes the need for making adjustments in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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